Jiang Lin, manager of a small printing company in Shenzhen, was happy at the news that the bank offering financial services to his company had launched a new mortgage product after Spring Festival. With this product, Jiang's company will now be able to buy manufacturing facilities on hire purchase.

 

The bank service, similar to leasing business, is targeting a growing number of companies that lack funds.

 

China's commercial banks have been trying to diversify their businesses as part of their restructuring drive to ease their dependence on interest income. Leasing, an internationally recognized financing channel and with huge development potential in China, has been one of their focuses.

 

The new rule on financial leasing, which took effect on March 1, allows commercial banks to directly engage in the business.

 

It stipulates that commercial banks can invest in financial leasing companies if they have a capital adequacy ratio of no less than 8 percent, total assets of no less than 80 billion yuan in the previous year, and if it has turned a profit for two consecutive fiscal years.

 

It's a major measure adopted by the regulator to encourage banking operations, said She Minhua, a banking analyst with CITIC China Securities.

 

Previously, the government forbade bank capital in the business because of higher capital risks and the country's stringent supervision rules on separated banking operations.

 

"This rule will enable commercial banks to expand their scope of business, customer base and improve profitability, and thus contribute to the enhancement of their core competence," She said.

 

China Minsheng Banking Corp might be the first to invest in a financial leasing company. Last month, its board of directors approved the proposal to establish a financial leasing firm jointly with China Power Finance Co Ltd and Tianbao Holding Company.

 

Minsheng will hold a 51 percent stake in the 4-billion-yuan venture, while the other two have 34 percent and 15 percent respectively.

 

The Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, and China Merchants Bank have also applied to the China Banking Regulatory Commission for permission to deal in financial leasing.

 

"The leasing business will add a new profit source for commercial banks, especially banks with smaller interest incomes compared with the Big Four," said Shi Jianping, a professor at the Central University of Finance and Economics.

 

Minsheng's moves in leasing-related business last year are proof of that. The bank launched a leasing and financial services department in the first half of 2006, offering eight products in cooperation with financial leasing companies. Its leasing-related business assets have reached 10 billion yuan since.

 

"The new rule is good news not only for commercial banks, but also for the financial leasing industry," said Qiu Qiyang, of the Financial Leasing Professional Committee at the China Society of Finance.

 

The rule clearly defines financial leasing as a part of financial business and makes commercial banks and big equipment manufacturers possibly the biggest investors in the sector.

 

This is in line with the common practice in major market economies, where shareholders of leasing firms are generally banks or equipment providers.

 

"Commercial banks' involvement is expected to spur a rapid expansion of the financial leasing sector, which has experienced years of stagnation, partly due to limited capital supply," Qiu said.

 

Financial leasing is a written agreement between the lessor and the lessee for a specified term in which the equipment and manufacturer are chosen by the customer, bought and owned by the lessor and the right of using the product is given to the lessee.

 

It was introduced in China in 1981, when the first financial leasing company, China Orient Leasing Company, was established.

 

But lack of funding channels, substandard corporate governance and over-concentrated shareholding hampered the industry's development.

 

Some private enterprises even use financial leasing companies as financing tools for themselves.

 

Only six of the 12 financial leasing companies approved by the banking regulator are in regular operation. Two closed operations for many years, two went bankrupt and two are undergoing restructuring.

 

"There will be a great reshuffle among financial leasing companies as commercial banks can acquire the existing ones or spur competition by setting up new ones," CITIC China Securities' She said.

 

(China Daily April 6, 2007)